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Unformatted text preview: Introduction to microeconomics Friday, September 18, 2009 What is the definition of the price elasticity of demand? What is the relationship between elasticity of demand and the amount spent on a good? What are the determinants of the Price Elasticity of Demand? Tuition has been rising faster than the overall cost of living for years. But does rising tuition keep people from going to college? A 1988 study found that a 3% increase in tuition led to an approximately 2% fall in the number of students enrolled at four-year institutions, giving a price elasticity of demand of 0.67 (2%/3%) and 0.9 for two-year institutions. Enrollment decision for students at two-year colleges was significantly more responsive to price than for students at four- year colleges. The result: students at two-year colleges are more likely to forgo getting a degree because of tuition costs than students at four year colleges. Responding to your tuition bill What is the cross-price elasticity of demand between two goods? What is the significance of its sign? What is the income elasticity of demand ? What is the significance of its sign? What happens to the expenditure on a good as a share of total expenditure when that good has an income elasticity of demand that is < 1? >1? 1) The income elasticity of demand for food is much less than 1—it is income inelastic. As consumers grow richer, other things equal, spending on food rises less than income as the U.S. economy has grown, the share of income it spends on food—and therefore the share of total U.S. income earned by farmers—has fallen. 2) Agriculture has been a technologically progressive sector for approximately 150 years in the U.S., with steadily increasing yields over time. Competition among farmers means that technological progress leads to lower food prices. Meanwhile, the demand for food is price-inelastic, so falling prices of agricultural goods, other things equal, reduce the total revenue of farmers progress in farming has been good for consumers but bad for farmers. Why do so few people now live and work on farms in the United States? The price elasticity of supply is a measure of the responsiveness of the quantity of a good supplied to the price of that good. It is the ratio of the percent change in the quantity supplied to the percent change in the price as we move along the supply curve....
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